Favoured by regulation and tax incentives,
annuities have become by far the dominant post-retirement solution
in Europe.

This bias towards substantial
annuitisation of retirement savings early in retirement is,
however, not justified, argue Raimond Maurer and Barbara Somova of
Goethe University in Germany in a study undertaken for the European
Fund and Asset Management Association (EFAMA).

“In an environment where individuals can expect to live 20 to 30
years in retirement, forcing to buy an annuity at the age of 65 is
out of date,” said EFAMA director general Peter De Proft at a
function in Brussels marking the launch of the report:
Rethinking retirement income strategies – how can we secure
better outcomes for future retirees.


“Individuals should be allowed to select
more profitable investment products,” continued Proft.

“We hope that policymakers will take this
finding seriously and agree to support on equal terms both
annuities and innovative products that use effective portfolio
management techniques.”

In the EFAMA study, Maurer and Somova set
out to demonstrate that the best investment strategy in retirement
is to hold a significant proportion of pension assets in equity
early on and to switch progressively to bond holdings and annuities
over time.

“The benefits of investment
diversification extend well beyond normal retirement age,” said
EFAMA president Mathias Bauer.

“By keeping a balanced asset allocation of
their pension savings for an extended period after retirement,
individuals can expect to achieve substantially higher retirement
income, at a comparatively low risk”.

According to the study’s authors, 70
percent of individuals can expect to enjoy up to a third higher
consumption level if they hold equity at the beginning of
retirement and gradually switch to annuities over time rather than
annuitise all their wealth at the age of 65. Their conclusion was
based on simulations of consumption levels under different
financial market conditions.

Against this background, Bauer stressed:
“The European investment management industry is fully committed to
playing its role in assisting households by developing innovative
alternatives to annuities, capable of converting pension savings
into a recurrent income stream after retirement.”

EFAMA called on European regulators to
reassess their bias towards annuities and place alternatives on an
equal competitive footing with annuities. At the very least EFAMA
wants the upper age limit for compulsory annuitisation should be
increased toward 85. In the UK, for instance, retirees are
currently required to buy an annuity by the age of 75.

EFAMA represents 24 member associations
and 43 corporate members which had combined assets under management
of about €14 trillion ($18 trillion) at the end of 2008.